On Nov. 4 San Francisco voters are being asked to approve Proposition J, a measure which increases the minimum wage in San Francisco to $15 per hour by 2018 from the current city rate of $10.74. San Franciscans should think carefully before approving this measure.
When a business hires an employee, the business evaluates the total cost of employment as opposed to the wage being offered to the employee. Using the $15 minimum wage as an example, the total cost of employment breakdown based on a 2,080-hour full-time job for a firm employing 20+ workers with typical workers compensation and unemployment insurance rates is as follows:
Employer contribution to Social Security and Medicare (7.65%): $2,386.80
San Francisco payroll tax (1.5%): $468
Healthy San Francisco ($1.65 to $2.48 per hour in 2015): $3,432 to $5,158.40
9 personal days as required by SF Law (direct wage cost only): $1,080
Workers Comp Insurance (7.5%): $2,340
CA Unemployment (4% of first $7,000): $280
State Disability (1%): $312
Total: $41,498.80 to $43,225.20
Keep in mind that the total number does not account for vacations or any other sort of employment costs including payroll services, benefits, uniforms, meals, etc. It does not include the cost of Obamacare under the employer mandate provision for firms in the categories of those with from 50 to 99 employees; or 100 or more employees.
The implication of the above is that businesses will only hire employees to the extent that the employee can create a minimum of $41,498.80 in productivity (or $19.95 per hour). For most businesses, the amount of productivity will need to be considerably higher in order to account for the cost of goods sold and administrative costs, and to allow for the business to make a profit.
Another way of looking at this is to say that any job which does not generate $41,498.80 in incremental value will not be filled. This implies an increase in unemployment for low-skilled labor. The hardest hit will be poor people, minorities, immigrants, young people and old people. Not everyone is capable of creating $41,498.80+ in value. Goodbye to entry-level jobs!
Proposition J will drive employment out of the city of San Francisco and into neighboring counties. It is likely some businesses will move further; just look at the existing exodus of California businesses (and jobs) to Nevada and Texas. For more information on this, see PRIs 2012 book, Eureka!: How to Fix California, by Dr. Arthur Laffer and Dr. Wayne Winegarden.
Proposition J will cause an increase in black market activity (crime) because employers will look to pay people under the table in order to avoid compliance with the law. As the gap between the market rate (what someone is willing to pay/accept) and the minimum rate (as required by law) becomes larger, so too will the black market in labor.
So Proposition J will mostly hurt the people it is meant to help. It will increase unemployment, and encourage San Francisco businesses to close and/or migrate. It will expand the black market in labor, thus criminalizing San Francisco residents.
Is this what San Franciscans want?
I would posit that our tax policies (local, state and federal) have created an environment which discourages hiring workers. As seen from the above example, local, state and federal mandates add a minimum of 33 percent to the cost of hiring an employee. Tax policy should be changed to remove the burden of hiring new workers.
To the extent that our society is willing to subsidize certain members, tax policies should be revised to encourage employment. They need to recognize that work has an intrinsic value.